Chained CPI: The Latest Wonk-Speak for Social Security Benefit Cuts

Ezra Klein casually mentions that chained CPI (CPI stands for the Consumer Price Index) may be part of the deficit deal.

Right now, Social Security’s cost-of-living increases are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers and the tax code is indexed to the Consumer Price Index for All Urban Consumers. For reasons too technical to go into in this post, but which the truly committed can read about here, experts on both sides of the aisle think that these measures overstate the actual rate of inflation.

To answer these criticisms, the Bureau of Labor Statistics created a new measure of inflation known as “chained CPI.” Because I’d like at least a few readers to get to the end of this post, I’ll omit the gory details. What’s important is that, as you can see on the graph atop this post, it grows more slowly than its predecessors. That means two things: The checks issued by Social Security and other federal retirement programs grow more slowly, and people’s incomes grow more quickly than the tax brackets. So the government spends less and, because more people are finding themselves in higher marginal tax brackets, raises more.

Like Klein, I’ll say that we can go into the details, but they don’t really matter. The end result is that chained CPI results in a smaller COLA. To add some numbers to this, chained CPI leads to $300 billion in government savings over ten years, $200 billion from smaller benefits on Social Security and other programs which use a COLA, and $100 billion from higher taxes because the brackets increase more slowly. So it’s a 2:1 benefit cut to tax increase.

As for what this means to the average Social Security beneficiary, Rep. Xavier Becerra askedSocial Security’s chief actuary to assess the impact of moving to chained CPI on benefit levels. Basically this would lead to an average COLA reduction of 0.3 percentage points every year. Over time, those numbers accumulate. So an 85 year-old beneficiary misses out on 6.5% relative to current scheduled benefits. That’s for those who turn 65 the year of the turnover; those who turn 65 in later years end up losing out on much more income. Over time, this generates a lot of savings out of the checks of Social Security recipients.

So let me ask you: do you think that the Social Security system produces checks that are too large? My grandmother is a recipient. Her rent in a very modest apartment and her Medicare premiums take up 80% or so of her entire Social Security check. She makes do with other savings, but money is extremely tight.

It seems that the practical effect of making a more parsimonious Social Security benefit through chained CPI, which is not weighted to the cost of living for the elderly, including their health care costs, but weighted to a more “realistic” cost of living according to someone with a green eyeshade, would be that seniors would need more help to pay their bills, either in government welfare programs (which defeats the entire purpose and just shifts the cost from federal to state agencies) or their children and family (which sucks dollars out of the economy and weakens it).

If the retirement age cannot be raised, if a real benefit cut cannot be undertaken, this is plan C – a wonkish, confusing-sounding concept that is intentionally obtuse. But it’s really not. It’s a benefit cut.